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Technology and I.P.

By Stan Liebowitz, an economics professor at the University of Texas at Dallas

Andrew Popper, in his insightful paper on problems and remedies of software theft, focuses on an aspect of theft that is not often considered. Instead of considering the theft of final consumer goods, he focuses on the theft of intermediate goods used in the production of other goods. The thieves in this case are companies, not individuals, and they produce products using stolen software, giving themselves an advantage over their more honest competitors.

Theft is normally considered harmful to society for several reasons. Most importantly, if theft is allowed to become common, the linkage between effort and reward is weakened for law abiding citizens, thus reducing or eliminating incentives for individuals to provide the efforts to be productive. If the neighborhood thug is capable of taking all the fruits of your labors, you lose an incentive to labor. It is also the case that individuals and governments spend resources trying to reduce theft (so that individuals will have incentives to work) and these are resources that could have been used for other more productive purposes if not for theft.

The economic model of competition provides clear predictions of how competition would work for firms within an industry when this type of theft is permitted. In the short run, the low cost producers (using pirated software) will earn higher profits than the high cost producers. In the longer run, the low cost producers will drive the high cost producers out of business.

Normally, we want more efficient firms to drive out the less efficient firms because that lowers the cost of the product and lowers prices for consumers. There is another, probably more important reason to want the more efficient firms to prevail, although this is often left out of the simplistic economic models of competition. The expectation is that the current lower cost firms are generally the better and more capable firms, and thus as conditions change over time, the fitter firms are likely to better handle these changes. This is the same reason that sports teams try to pick the players with the best statistics — because the expectation is that the players who have been above average will stay above average during their productive careers.

Large-scale theft of information technology and intellectual property is becoming an increasingly serious problem for U.S. manufacturers competing in the global market, requiring new and better mechanisms for enforcement, according to a new ACS Issue Brief.

In 2009, for every $100 worth of legitimate software sold, an additional $75 of unlicensed software “also made its way into the market.” And in 2010, the estimated value of stolen software spiked 14 percent.

“Companies profiting from stolen IT are not just free-riding on the successes of those who design and produce the products and ideas that drive the U.S. economy—they are destabilizing the pricing market and distorting lawful competition,” Popper writes.

To tackle this problem, enforcement should directly address the harms this theft imposes on the competitive market through both state and federal unfair competition mechanisms, Popper asserts.

Responding to the concerns of 39 attorneys general over the impact of piracy on the U.S. manufacturing industry, a bipartisan group of senators has asked the Federal Trade Commission to “use all tools at your disposal to fight the theft of and use of stolen American manufacturing information technology (IT) and intellectual property (IP).”

The request comes in response to a November letter from the National Association of Attorneys General that asked the FTC to help the AGs combat piracy by deploying a section of the Federal Trade Commission Act that prohibits unfair methods of competition.

“Competition is the bedrock of free enterprise,” they write. “Competition is unfairly distorted, however, when a manufacturer gains a cost advantage by using stolen information technology, whether in its business operations or manufacturing processes. It offends our sense of fairness when such wrongdoers reap commercial advantage from their illegal acts.”

The White House appears to being moving closer to revealing a strategy for addressing rising concerns over privacy breaches in cyberspace.

Politico reports that a White House event tomorrow is “likely to set the stage for the public unveiling of the administration’s highly anticipated white paper on online privacy, which has been more than a year in the making. The white paper is expected to call for a consumer privacy bill of rights from Congress, while charging the industry to police itself under the watch of federal regulators.”

Some commentators suggest that the administration’s policy is likely influenced, in part, by the work of the Commerce Department’s Internet Policy Task Force, which issued a green paper after a year-long review “that included extensive consultations with commercial, civil society, governmental and academic stakeholders ….”

The potential release of the administration’s plans to address privacy concerns comes admist reporting by The Wall Street Journal that the Internet advertising giant, Google, had bypassed “the privacy settings of millions of people using” Apple’s Web browser, Safari, apparently allowing Google to track “the Web-browsing habits of people who intended for that kind of monitoring to be blocked.”

Promoting rivalry in innovation requires a fusion of legal policies drawn from patent, copyright, and antitrust law, as well as economics and other disciplines. Creation without Restraint looks first at the relationship between markets and innovation, noting that innovation occurs most in moderately competitive markets and that small actors are more likely to be truly creative innovators. Then we examine the problem of connected and complementary relationships, a dominant feature of high technology markets. Interconnection requirements, technological compatibility requirements, standard setting, and the relationship between durable products and aftermarket parts and supplies all involve interconnection, or “tying.” But views about the practice tend toward two extremes. Some see tying as inherently anticompetitive, while others view it as unexceptionally benign. In fact, bundling products or technologies is essential in high technology markets and most of it is socially beneficial, but some possibilities of abuse nevertheless remain.

Identifying good substantive legal rules for facilitating innovation is often very difficult. Two generations ago antitrust law addressed problems of complexity by shifting the focus to harm. The courts reasoned that they could often avoid unmanageable substantive doctrine by considering whether the plaintiff had suffered the appropriate kind of injury. Plaintiffs who are injured by more rather than less competition should be denied a remedy. In the case of patent and copyright law, the appropriate question is whether an infringer’s conduct served to undermine the right holder’s incentive to innovate, with incentives measured from before the innovation occurred. Some IP infringements do no harm to the incentive to innovate; others actually make the right more rather than less valuable. In these situations relief should be denied without inquiry into the merits of the infringement case.

Patent and copyright law are both in crisis today – major problems include overissuance, overly broad and ambiguously defined protections, and rules that permit both patentees and copyright holders to make broad claims on unforeseen innovations that lie in the future. The result has been that many patents are valueless, while others have very considerable value precisely because they enclose ideas or technologies that rightfully belong in the public domain. Patent law could be greatly improved if inventions were tied to real, nonobvious technology actually in the patentee’s possession at the time its application was filed, and if patentees were obliged to give comprehensible and timely notice of their inventions. Copyright law would be greatly improved by an aggressive theory of harm that reduces the scope of the derivative works right and increases the scope of fair use. In Eldred the Supreme Court suggested that the First Amendment should not be an important copyright infringement defense because the Constitution’s IP clause and the initial copyright act were passed “close in time,” leading to an inference that Congress must have considered these concerns. But the original copyright act bears little resemblance to the expansive coverage granted by the current Act, passed almost two centuries later.